Warren Buffett on How Size Has Done Him In

Warren Buffett is known for his long-term investment strategy. He is a prominent advocate of value investing.

Each year, investor extraordinaire Warren Buffett publishes a letter to the shareholders of Berkshire Hathaway, a personalized view of how he sees the previous year, the role of capitalism, and (this year) the investment strategies of his sister Bertie. But this year, he also admits that the company he has built has no future possibility of eye-popping growth, because of how large it has grown.

Think of it this way, say that you start off with an investment firm that is worth 0.1% of the net worth of the top 500 companies in the US. You do a superior job of investing that money, and double your share to 0.2%. You then double again and again and again to 0.4%, 0.8%, 1.6%, 3.2%, and 6.4%. Notice that each of these steps would make you a very successful investor. But notice also that each doubling gets harder, because each doubling requires a greater gain in the size of your firm relative to the market. Doubling from a small base is a lot easier that doubling from a large base. And Buffett is saying that his firm has become so large that future doublings are somewhere between hard and impossible. Here’s his comment from this year’s letter:

Our goal at Berkshire is simple: We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen. At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure. …

This combination of the two necessities I’ve described for acquiring businesses has for long been our goal in purchases and, for a while, we had an abundance of candidates to evaluate. If I missed one – and I missed plenty – another always came along.

Those days are long behind us; size did us in, though increased competition for purchases was also a factor. Berkshire now has – by far – the largest GAAP net worth recorded by any American business. Record operating income and a strong stock market led to a year end figure of $561 billion. The total GAAP net worth for the other 499 S&P companies – a who’s who of American business – was $8.9 trillion in 2022. (The 2023 number for the S&P has not yet been tallied but is unlikely to materially exceed $9.5 trillion.)

By this measure, Berkshire now occupies nearly 6% of the universe in which it operates. Doubling our huge base is simply not possible within, say, a five-year period … There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can’t. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.

Nevertheless, managing Berkshire is mostly fun and always interesting. On the positive side, after 59 years of assemblage, the company now owns either a portion or 100% of various businesses that, on a weighted basis, have somewhat better prospects than exist at most large American companies. By both luck and pluck, a few huge winners have emerged from a great many dozens of decisions. And we now have a small cadre of long-time managers who never muse about going elsewhere and who regard 65 as just another birthday …

With that focus, and with our present mix of businesses, Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital. Anything beyond “slightly better,” though, is wishful thinking.

Pointing out that it’s easier to have a fast growth rate from a tiny base than from a larger base is a lesson worth remembering in many contexts. As one example, the economy of China had very rapid growth for some decades, but starting from an exceptionally low base. There are multiple reasons for China’s current economic woes, but one unavoidable issue is that when you get bigger, growth rates get harder to achieve.